They hit the jackpot once, and then think they have the magic. It’s up to financial advisers to burst their bubble.
By DAISY MAXEY
Sometimes, the worst thing that can happen to an entrepreneur is being successful.
So say many financial advisers who tell tales of entrepreneurs who hit it big—only to let success go their heads. It’s then up to the advisers to somehow keep their clients from taking subsequent risks that threaten their financial future.
Financial adviser Tony DaRoza, for instance, remembers all too well the client who did so well he ended up losing $100 million.
After selling his first technology company and taking his second public, the client took only enough money off the table to ensure that his family would be fine and that his children could go to college, recalls Mr. DaRoza, a managing director at the Merrill Lynch Wealth Management unit of Bank of America Corp. in San Francisco. Most of the rest disappeared when the tech bubble burst, he says.
The problem, Mr. DaRoza says, rests with the “gambling mentality” of some entrepreneurs. A bit of a risk-taking bent is a good thing; it’s how entrepreneurs make their fortune. But after one or several successful business ventures, entrepreneurs may begin to believe they’re infallible. And for some it isn’t just their own endeavors they’re certain of; their confidence in taking risks may kick in when they are approached by a persuasive colleague, acquaintance or family member seeking money for a new venture.
Financial advisers often step in to try to prevent what they see as dangerous lapses in judgment. They advise their entrepreneurial clients to stick to budgets, build nest eggs independent of their own businesses, remain diversified and vet business pitches or plans carefully—whether their own or those of others.
To keep a real risk taker in check, an adviser may enlist the help of a family member, connect the client with angel investors so he doesn’t burn up all his own capital, or intervene to tell cash seekers that a particular investment isn’t going to happen.
The Big Picture
Jason Archambault, a founder of Providence, R.I.-based SK Wealth Management LLC, poses questions to help entrepreneurs put a new venture or investment into the context of their entire net worth. Among them: Do you need to make this money or is it just something you just want to do? If this venture fails, can you afford it?
Clients’ friendships can complicate matters, and again, providing context is an important role for advisers. When a former employee of Yelp Inc.YELP -1.61% asked financial adviser Keley Petersen to help him decide whether to invest in a friend’s restaurant, Ms. Petersen discussed the risk profiles of restaurants generally as well as the particulars of the proposed investment with him. She also showed him how he could get a similar return by taking less risk.
“Then he could go to his friend, and say, ‘I just can’t do this,’ ” says Ms. Petersen, president of Berkeley, Calif.-based Willow Grove Advisors LLC.
It’s not uncommon for clients to consider investing in ventures that don’t even have a business plan, says Jeff Leventhal, managing director with HighTower Advisors LLC in Bethesda, Md. He poses a list of questions to any client considering investing with others. Among them: How much of their own net worth are those seeking the money putting into the venture? Do they have any experience in the business?
Sanjeev Sardana, chief executive of BluePointe Capital Management in San Mateo, Calif., says he saw many Silicon Valley technology entrepreneurs suffer losses on investments in other companies when the tech bubble burst in 2000. One of his clients made a lot of money when his tech company went public, then had a line of people waiting outside his door to present proposals. These entrepreneurs would spend 20 or 30 minutes talking with the client, then walk away with checks for $300,000 or $500,000, Mr. Sardana says—and the client watched that kind of investment disappear more than once.
“Today, [that client] is a very cautious man,” who writes out only a handful of checks each year for ventures in which he’s actively involved, Mr. Sardana says, and those checks are smaller.
Mr. Sardana starts out by establishing a budget based on his clients’ balance sheet and desired lifestyle. “We tell them, ‘Look, based on your portfolio, this is your limit for [entrepreneurial investment] this year,’ ” he says. “Otherwise, there’s always the next great idea, and where do you draw the line?”
Seeking a Balance
Advisers need to be careful not to treat entrepreneurs like other investors, says Evan Kirkpatrick, chief executive of Wendell Charles Financial, a Manhattan Beach, Calif.-based wealth manager.
“They do have a higher risk tolerance, and they’re trying to create and disrupt within a particular industry,” he says. He sees the adviser’s job as balancing the goals of protecting entrepreneurs from extraordinary risk while supporting them as they innovate and create jobs.
“It’s very common for entrepreneurs to want to put every last penny from an exit into their next venture, and just go,” Mr. Kirkpatrick says. One of his clients, for example, sold his technology business for $10 million on a Monday and, on Tuesday, wanted to put $6 million into his next tech venture. Instead, Mr. Kirkpatrick helped him line up other investors so the client didn’t risk so much of his own capital.
Mr. DaRoza says his client who lost $100 million is now building out a third technology company. “He doesn’t blame us” for his previous loss, says Mr. DaRoza. “He now says, ‘You told me too many times.’ ”